The Dubai Financial Issues’ Effect on the US Dollar

11/30/2009 10:47 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

News that a property development arm of Dubai World requested to delay its payments triggered sharp volatility across the financial markets. The story actually broke on the eve of November 25, and on the 26th , currency traders began to flock into the safety of US dollars. The demand for dollars was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY fell to a 14-year low when the Asian markets opened last night. However, the selling did not continue into the US trading session. The limited number of US traders at work today sold—rather than bought—dollars, which suggests that not everyone believes that the Dubai news will have global ramifications. Whether this is true or not remains to be seen, but whenever there is a situation where traders are unsure about how the political or economic environment will pan out, such as Dubai's woes, they always sell first and ask questions later. As a result, the USD and JPY were the biggest beneficiaries.

Understanding Dubai’s Problems

A major exogenous risk like the Dubai news is one of the few things that can trigger a bottom in the US dollar as the greenback's safe-haven status overrides US fundamentals. On the eve of November 25, the Thanksgiving Holiday in the US and the Eid holiday in the Middle East, Dubai World shocked the markets by saying that its property developer, Nakheel, has requested to delay its December 14 debt payments. Dubai World is not technically owned by the Dubai government, but with liabilities of US$59 billion, it is a significant amount of the total estimated US$80-$100 billion in Dubai's liabilities. As a result, investors fear that this could mean an outright default on Nakheel's debt as delinquency is usually the precursor to default. Although the market has clearly not taken this news well and believes that it is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, US and European banks have very small exposure to Nakheel’s debt. Granted, a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina-style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East.

All Eyes on Black Friday Results

In other news, it is Black Friday in the US, which is a “make it or break it” day for many US retailers. It is their chance to turn a profit and gauge the strength of the entire holiday shopping season. As usual, consumers have lined up at the big retailers as early as midnight to take advantage of special offers. According to surveys on the street, most consumers expect to spend less this year as compared to prior years. However, more people are expected to take advantage of Black Friday deals. The tally on how well the retailers did will probably begin to come in over the weekend, and it will receive more coverage on Monday. If retailers do not perform well this holiday shopping season, we could see a new round of layoffs.

By Kathy Lien of GFTForex.com

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